Monday, September 20, 2010

Temple-Inland (NYSE:TIN): August c'board hike abruptly fails;

While market sentiment seems to be fairly bullish this morning, I choose to look at the potential shorting opportunities. I think the bullish sentiment is currently at or near extremes. That usually indicates we have some downside in store.

Several firms (tier-1's) are commenting on containerboard companies this morning after Pulp & Paper Week (P&PW)reported in its Sept. 17, 2010 issue that some containerboard producers are abandoning the August containerboard price increase in September amidst customer resistance and limited follow through to box prices. As a result, P&PW has rescinded the $40 per ton containerboard increase reflected in August as P&PW believes producers will “rebate the price hike back to customers.”

- Goldman Sachs is out saying the The commentary in P&PW runs contrary to what they have been hearing from containerboard producers over the past few weeks, as well as the tightness in the market reflected in the Aug. containerboard data reported on Sept. 15. Firm had been forecasting containerboard producers to realize an additional $10 of price in September following the $40 increase realized in August.

They are surprised and disappointed by the revision to the August price increase in P&PW given the recent comments and our discussions with industry contacts and with the relatively tight market.

As a result of the lower-than-expected prices reported in P&PW, Goldman sees downside risk totheir 2011/2012 EPS forecasts for containerboard producers, such as Temple-Inland (Buy; last close $20.08), International Paper (Buy; $23.46), and Packaging Corp. (Neutral; $24.35). They expect the containerboard stocks to be negatively impacted on Monday by the price revision, as investors with whom they have spoken recently indicated they were expecting the August price increase to be sustained. However, Goldman does not anticipate significant weakness in the stocks as they estimate the market is already discounting that the August containerboard price increase would not be sustained.

- Credit Suisse - Wham! Last week, the firm notes they learned on Wednesday that US inventories of containerboard ended August at a record low for the month (in terms of weeks of supply). On Thursday, RISI reported that the full €60 per metric ton (about $71 per short ton) price increase in Europe was easily accepted, marking the third price increase in Europe since just April. And then…RISI on Friday night reported that theentire $60/ton US price increase started in August had collapsed, surprising them but probably not the Street (as much) given valuations.

So far in this containerboard pricing up-cycle, there have been two price increases totaling $110/ton (21%), with $50 in January and another $60 in April. These 2 increases have brought US prices up to near "mid-cycle" levels. Amid a global backdrop of tight supplies and limited capacity growth, CSFB sees an additional two increases this up-cycle totaling $80/ton–ironically to just $20 above where prices would have been if the $60/ton August increase had been successful. Moreover, another $80/ton in US prices would mean that US prices are still $52/ton below the current European price!

Lower EPS Estimates, Targets: As a result of their lower containerboard price forecast, they are reducing their 2010, 2011 and 2012 (expected peak year) EPS estimates for the four containerboard-related names (IP, PKG, RKT, and TIN).

- Deutsche Bank has probably the most subdued reaction saying they expect near-term pressure on stocks. Recently, most stocks appeared to be discounting a marked decline in prices - not an increase.

DBAB notes they are not at all shocked that the hike floundered. They're surprised that it occurred in this abrupt fashion. If one assumes that 2011 average prices will now be $40/ton lower, $1.4B in prospective 2011 EBITDA has vaporized. Use a 6-7X multiple on that EBITDA, the hypothetical value implications are impressive. Thishike was a "toughie". But, with operating rates in the high 90s, inventories at historically low levels, and demand in positive territory, rational investors have legitimate questions for industry leaders.

As a result they are reducing est’s for International Paper, Smurfit-Stone, Temple-Inland, Rock-Tenn, Packaging Corp and Greif. They will be reviewing price targets over the next day or two in light of reduced est’s. DBAB notes that even w/o the 3rd increase, containerboard co's are still trading at low multiples relatively to historical averages.

Notablecalls: I think shorting some TIN, PKG or even IP around open may be a smart move. All have been fairly strong of late and it may be time to let some air out.

The EPS cuts I have so far seen from some of the boutique firms are pretty hefty.

I'm not expecting huge downside here. The names are not going to be shot. Say around 5%-7%

4 comments:

I don't think shorting is such a great play. TIN is not a one trick pony. Even with the potential rollbacks in board pricing, that part of Tins production can still be profitable. The previous quarters sales of board were very flat and the slightest increase in building will more then likely reflect an increase in revenue. There are also incidentals that will come into play. The fact that plants were shut down and out of production during the previous quarter. That time was used to perform maintenance therfore tightening up their production schedule. The use of downtime during an already slow production quarter is a key move. There are also millions in tax breaks that are being reinstituted as well. Another think to look for is the reduction in operating costs as one of the plants have been shut down. This decrease in operating expense will help show some improvment in their bottem line. Let us not forget the last quarter,TIN had to go out on the open market to purchase supplies that they usually have on hand. Another expenditure that should not be included in their bottom line.An additional item to look for is that the management had expressed a dedicated desire to seek out new business. A rise in housing starts, consumer spending and consumer confidence combined with lower operating costs and tax write offs should go a long way in drubbing the impact of partical board. Go short? Not me. I imagine we'll find out tomorrow morning.

After looking at the numbers and listening to the officers at the TIN earnings meeting it's clear that TIN is poised to take advantage of a seriously wounded industry. Downsizing, revamping, debt reduction and cash flow are a sure sign that TIN is coiled and ready to swollow and absorb someone. The fact that particular plants are producing at above previous capcity provides the opportunity to relocate manufacturing to accomodate the high speed turnaround time for production. This frees up other plants and allows opportunity for picking up new business through aquisition. The key phrases here are consolidation of current assetgs and production, aquire new similar business to occupy the new openings in production time and space and reduce non productive aquired assets through disposition. I need a litte more time to observe and pinpoint who is on the hit list but make no mistake TIN is on a roll.